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Date : 13/10/2020

Transurban Group

ASX :

TCL

Market Cap : $38.11 Billion

Dividend Per Share : $0.16

Dividend Yield : 3.37 %

Buy

52 Week Range : $9.10 - $16.44

Share Price : $14.00

The firm is investing for growth and has a number of projects in its pipeline. The government stimulus package will de-risk the firm. A "Buy" from us.

Company Analysis

Transurban Group (ASX: TCL) is an Australian builder and operator of toll roads in Sydney, Melbourne, and Brisbane. The company also operates in the USA and Canada. TCL has over 20 roads under operations that are used by 8.8 million road users.

Among the toll road operators in Australia, Transurban Group is the biggest player. The firm incurs huge fixed costs to build its assets – roads, and then generates revenues through tolls paid by the road users. Hence, their profitability is driven by external factors such as the transportation industry, and tourism industry.

Transurban completed 3 projects in FY2020 and has 6 ongoing projects in its pipeline that are due to completion by FY2024 – suggesting growth in revenues to come in the near future. The below image shows the $19 billion project pipeline Transurban has on its hands.


Source: Transurban Group

The firm draws most of its revenues from Australia – Sydney in particular. The travel restriction imposed due to the pandemic has hit the transportation and tourism industry the hardest. The average daily traffic reduction was reported to be 8.6% in FY2020 – resulting in a 3.4% decline in toll revenue for the group. Melbourne and Sydney in Australia were one of the most affected areas in the country, and the cities, especially Melbourne were put to a halt recently to combat the spread of the virus. This is sure to further decrease revenues in the early parts of FY2021.

Since the big dip in traffic that was seen in March and April, the numbers have recovered and a steady growth rate can be seen from the below image – showing the impact of Covid19 on traffic as reported by Transurban Group. The steady recovery is a positive sign, the new projects are sure to add to the total traffic TCL’s roads see, however, the upside potential is still questionable as the lasting impacts of Covid19 (such as work-from-home becoming the new norm) to the industry is yet to be determined.


Source: Transurban Group

Company Updates

Transurban Group reported a 25% decrease in average daily traffic in the September quarter due to the travel restrictions in place. The decline was mainly driven by Melbourne – with a 58% reduction. The numbers in Brisbane and North America reduced as well – by 9% and 28%, respectively. Sydney on the other hand increased by 1.5% as workday traffic and large vehicle traffic surged.

The decline in average daily traffic resulted in the stock plunging during the crash in March. April continued to be tricky as investor moods were negative. However, due to Australia’s exceptional management of the coronavirus, the stock has recovered since then and is currently trading 14.5% off its 52-week high.


Source: Tradingview.com

The volatility may continue to persist in the short-term as North America still continues to be affected. Australia’s economic recovery will greatly influence the volatility of stocks in the infrastructure and transportation industry. Investors will also be weary over traffic returning to previous levels as workday traffic may be affected in the long-term.

The group has raised US$900 million in debt by issuing 10.5-year notes in the 144A/Reg S market. The group added the money will be used to fund the upcoming pipeline projects.

The economic stimulus efforts that are made by the government brings a lot of positives to the infrastructure industry, and TCL is believed to be working with the government to support the road to recovery for the economy.

Industry Analysis

Revenues from toll road operation depend on average daily traffic. Workday traffic and large vehicle traffic are the biggest drivers of average daily traffic. We estimate the large vehicle traffic to go back up to pre pandemic highs in due course, however, the situation surrounding workday traffic is a tad bit tricky.

The industry as a whole is forecasted to grow at 5%-6% annually over the next 5 years. Government spending has somewhat reassured these growth rates.

The key characteristics that define the industry are as below:

  • High barriers to Entry
  • High capital Requirements
  • Low revenue growth in assets

Growth in population will result in a growth in the automotive industry, as the demand for cars will increase. This trend is everlasting and will continue to drive growth in the industry.

As businesses and the economy flourish, so will supply chains. This will result in a rise in large vehicle traffic that plays a major part of toll revenues.

Investment Thesis

Transurban total operating revenue recorded was $3.6 billion in FY2020 – falling by 13.2% from the previous year. Most of the toll revenues for TCL comes from Sydney, while North America is the least weighted.

Toll revenue from Sydney increased by 2.8% amid car traffic decreasing by 6.6% and large vehicle traffic decreasing by 4.9%. The growth in revenue was driven by the new assets that have been in play – M4 tunnels and increasing interest in M5 West to 100%. This resulted in a 2.8% increase in EBITDA.

Melbourne was the most affected in the Australian segment for Transurban. The revenues declined by 8.1%, and EBITDA by 11.4% as Covid19 restrictions were the strongest here – resulting in massive declines in traffic.

Revenues from Brisbane decreased by 1.9%, and EBITDA by 2.6%. The reduction was slightly offset by the new Logan Motorway – increasing total traffic in the region which had otherwise slipped by 7.8%.

North America has been the worst affected by Covid19 and has also been the subject to the most restriction over a long period of time – resulting in a 14% decrease in toll revenue, and 26.7% decline in EBITDA. Car traffic plunged by 10.7%.

The total EBITDA of the group stood at $1.8 billion – representing a 9.5% decline from FY2019. The industry is very capital intensive. This limits the net income the firm earns whenever investments are made towards new assets. TCL reported a net loss of $111 million in FY2020. While this may be temporary, the below chart shows just how much new investments add to the volatility of new income the group can earn.

The group has a BBB+ debt rating from S&P. The total debt held by the group is about $22 billion. The cash position of the firm is $2.4 Billion. The short-term outlook for the firm raises red flags as the firm may face difficulties meeting debt obligations.

The long-term financial health is a sign of strength as the group’s massive assets come into play. The firm holds $36.5 billion in total assets and $27.7 billion in total liabilities. The firm is capitalised by debt to the extent of 71.4%.

Of all the risks associated with TCL, its debt levels are the highest. The graph below shows the debt maturities of the group.


Source: Transurban Group

The group’s earnings per share was a negative $0.04 for FY2020. The total dividend paid was $0.47 per share. The latest dividend paid was 16 cents with an annual yield of 3.37%.

Recommendation

Transurban Group’s earnings have taken a hit due to the pandemic. However, with the firm investing for growth, government aid, and the worst of the pandemic behind Australia, the firm’s recovery has begun. The high debt levels are a characteristic of the industry due to the capital-intensive nature of the development projects. We issue a “Buy” recommendation for the stock.

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